pets-com-failure

Pets.com Failure: What Happened To Pets.com In A Nutshell

Pets.com was an online seller of pet supplies founded by Greg McLemore and Eva Woodsmall during the dot-com bubble in 1998. In its first round of venture funding, Pets.com secured a 54% stake in the company from Amazon CEO Jeff Bezos. After filing for bankruptcy in November 1999, the company became one of the shortest-lived public companies in history. Pets.com represents all that was wrong with the business playbook of early internet companies: ambitious business plans, with aggressive assumptions, easy capital, and lack of reality checks, as early Internet companies went for grandiose plans, instead of gradually testing the market.

Background

Pets.com was an online seller of pet supplies founded by Greg McLemore and Eva Woodsmall during the dot-com bubble in 1998.

In 1999, the site and domain were purchased by venture capitalist Hummer Winblad and eventual CEO Julie Wainwright – later the founder of luxury fashion site The RealReal. 

Wainwright was tasked with getting the company off the ground and she did so with spectacular effect. In its first round of venture funding, Pets.com secured a 54% stake in the company from Amazon CEO Jeff Bezos

The company then raised $82.5 million in an IPO held in February 2000. The IPO followed an aggressive marketing campaign that saw advertisements placed during the Super Bowl and at Macy’s Thanksgiving Day Parade.

Initial sales were extremely promising, with the share price peaking at $14.

Just 268 days later, Pets.com declared bankruptcy and in the process, became one of the highest-profile victims of the dot-com bubble.

Below we will discuss how a company with a valuable domain name, strong eCommerce affiliate, and clever branding failed so quickly.

Unsuitable business plan and excessive spending

During its short life, Pets.com spent millions on advertising and marketing. From February to September 1999, the company spent more than $70 million (reference uky.edu/~dsianita/695ec/failure.html) despite only taking in $619,000 in revenue.

Adding to its incredible expenses were the salaries and benefits for over 300 staff.

The lack of a suitable business plan was also apparent.

The company sold its pet products at a third of the price it paid to obtain them with the belief that huge discounts and free shipping would win it a large customer base overnight.

Shoe seller Zappos had successfully used the same strategy, but Pets.com had not counted on the cost of shipping its products. Items such as dog food, cat litter, and pet crates were heavy or bulky and thus very expensive to post.

In an industry already characterized by slim profit margins, the company had no hope of turning a profit.

Poor understanding of target audience

Pets.com never planned to offer free shipping and deep discounts forever. Eventually, it wanted to move customers to high-profit margin purchases.

This move reflected a poor understanding of the target audience. In particular, the company failed to change pet food buying patterns because pets tend to react negatively to sudden changes in diet.

Pets.com also assumed that more people would buy pet supplies online in the first place. Without proper research, it failed to understand that the market for home-delivered pet food was unprofitable. 

Although this trend is more popular today, consumers in 1999 preferred to buy pet food in physical stores. This was partly for convenience, and partly because many simply didn’t know how to purchase something on the internet.

A lack of technology

To some extent, Pets.com was ahead of its time in the eCommerce space. 

In 1999, there were no plug-and-play solutions for scalable eCommerce, warehouse management, or customer service. As a result, the company had to hire a team of over 40 engineers. 

Cloud computing was also many years away, so the company had to create a server farm and hire yet more staff to ensure the website did not go down. The lack of technology drove operating costs higher still.

Start-up culture

Many start-up companies of the era provided catered meals or fully stocked kitchens to their employees. Games, gym memberships, group outings, and parties were also routinely offered as incentives. 

Pets.com management did not skimp on this culture, further hindering its ability to make a profit.

With excessive spending continuing in the face of an unprofitable business model, there was only one end for Pets.com.

Key takeaways:

  • Pets.com was an American online pet food retailer founded by Greg McLemore and Eva Woodsmall during the dot-com era. After filing for bankruptcy in November 1999, the company became one of the shortest-lived public companies in history.
  • Pets.com spent millions on marketing before bothering to verify whether there was a demand for its products. At the time, consumers preferred to purchase pet food in physical stores. 
  • Pets.com was ahead of its time, to some extent. Its high operating costs were exacerbated by a lack of suitable eCommerce, customer management, and cloud technology, among other things.

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